How Businesses Are Treated And Valued In A CT Divorce

Family-owned and closely held businesses are frequently the focus of property division in high-asset divorces. The valuation of these entities is likely to have a significant impact on equitable distribution. The ongoing viability of the business and future ownership structure are also important concerns. For business owners, the approach taken during a divorce must be measured and aligned with both Connecticut divorce law and the broader financial realities concerning the future operation of the business.

Property Classification: Marital vs. Separate Interests

Connecticut follows the principle of equitable distribution in divorce, meaning that the court divides marital property based on fairness rather than an automatic 50/50 split. This approach allows the court to consider a number of factors, including the length of the marriage, the contributions of each party, and each spouse’s economic circumstances, when allocating assets and debts. 

Connecticut is an “all-property” state for purposes of equitable distribution. Under Connecticut General Statutes § 46b-81, courts may assign to either spouse all or any part of the estate of the other spouse, irrespective of the name in which the property is held, when granting a dissolution of marriage.

This statutory approach differs from that of some other jurisdictions, which distinguish between marital and separate property. In Connecticut, the court may consider the value of any asset owned by either spouse, including pre-marital business interests, inherited shares, or assets held in trust, when dividing property equitably. Accordingly, even if a business was formed prior to the marriage, it may still be subject to equitable distribution if its value increased during the marriage or if one spouse contributed to its growth, either directly or indirectly.

In determining how to distribute business interests, courts typically consider:

• The length of the marriage
• The contributions of each party to the acquisition, preservation, or appreciation of the business
• The parties’ respective roles in the business and the household
• The source of any initial capital or inherited business shares
• Whether any spousal efforts resulted in increased goodwill or profitability

Krafick v. Krafick, 234 Conn. 783 (1995).

This expansive discretion means that individuals with ownership interests in businesses may see those interests scrutinized and divided in a manner that diverges from expectations based on title or origin alone.

Valuation of Family and Closely Held Businesses

It is common for the parties to a divorce to disagree on the value of a business. In Connecticut, the valuation of a closely held business is a question of fact to be determined by the court based on all relevant evidence. Siracusa v. Siracusa, 30 Conn. App. 560, 566 (1993).

Valuations are typically supported by expert testimony, and courts may rely on one or more generally accepted valuation methods depending on the nature of the business, the data available, and the role of each spouse. Courts must have a defensible valuation in order to allocate assets equitably, particularly when the asset in question is illiquid or lacks a readily ascertainable market value.

Common Valuation Methods

While specific techniques vary, three valuation approaches are most frequently used in Connecticut divorce proceedings:

1. Income Approach: This method evaluates the present value of future economic benefits expected to be generated by the business, typically using a discounted cash flow (DCF) analysis. It is often appropriate for businesses with consistent earnings and well-documented financials.
2. Market Approach: This compares the subject business to similar businesses that have been sold or publicly traded. It can be challenging to use this approach for unique or niche businesses with few direct comparable businesses.
3. Asset Approach: This method assesses the net asset value by calculating the business’s tangible and intangible assets minus its liabilities. It is most commonly used when businesses are asset-intensive or not profitable.

Experts may use multiple methods in combination or adjust their approach based on whether the business’s value is primarily derived from physical assets, ongoing cash flow, or intangible assets such as goodwill.

Goodwill and Its Treatment

The concept and value of goodwill frequently arises in family business valuations. Goodwill may be classified as either personal or enterprise goodwill. The distinction is important.

Personal goodwill refers to value that is tied to the reputation, skill, or relationships of an individual. This is often the business owner. Enterprise goodwill reflects value inherent in the business itself, such as branding, customer base, infrastructure, or systems.

Connecticut courts have recognized this distinction but have not adopted a bright-line rule as to whether personal goodwill is includable in marital estates. Eslami v. Eslami, 218 Conn. 801, 805–806 (1991). Generally, enterprise goodwill is likely to be included in marital estates and personal goodwill is less likely to be included. However, where personal goodwill is inseparable from the business or its income stream, courts may find it appropriate to factor it into the valuation.

Expert Testimony and the Role of Forensic Accountants

Given the complexity of business valuation, parties typically retain accountants or business valuation experts to prepare detailed reports and, if necessary, testify in court. These professionals examine tax returns, financial statements, corporate records, and market data to arrive at a defensible valuation.

Experts may also analyze:

• Compensation structures and whether one spouse is under- or over-compensated relative to market standards
• The effect of non-arm’s length transactions or commingling of personal and business expenses
• Debt obligations, shareholder agreements, or buy-sell provisions that could affect marketability or control
• Historical earnings and the reasonable expectation of future profits

Courts evaluate the credibility of competing expert reports and may adopt one valuation in full or in part, or arrive at a hybrid value based on a combination of presented data.

Addressing Ownership Interests and Distribution Options

After valuation, the court must decide how to distribute the business interest. Connecticut law permits the court to transfer ownership from one spouse to another, order a buyout, or allocate offsetting assets.

This decision is not easy, particularly when both spouses are involved in the business or when one spouse seeks to retain control. The court’s objective is to achieve an equitable result, not necessarily an equal division, and may consider both liquidity and practicality when assigning assets.

Common Outcomes

• Buyout: One spouse retains the business interest and compensates the other through a lump sum or structured payments.
• Offset: The non-owner spouse receives other marital assets of comparable value to their share of the business interest.
• Continued Joint Ownership: In limited circumstances, the court may leave both parties with ongoing ownership interests, although this is uncommon and typically discouraged due to the potential for conflict.
• Deferred Distribution: If immediate valuation is impractical, courts may delay distribution until a triggering event occurs, such as sale of the business or retirement.

Where the business is a primary source of family income, the retained interest may also factor into alimony determinations, particularly when the business owner will continue to derive income post-divorce.

Tax Considerations

Business interests in divorce carry significant tax implications. Transfers incident to divorce are typically non-taxable under Internal Revenue Code § 1041, but the allocation of assets, structuring of buyouts, and division of income-generating businesses can all affect the parties’ long-term financial positions.

Some tax-related issues that may arise include capital gains liabilities triggered by future business sales, allocation of retained earnings or retained losses, and valuation discounts applied due to lack of marketability or minority interest.

Double-dipping concerns may also arise if business income is used both for asset valuation and as the basis for alimony. Legal strategies must often be coordinated with tax advisors, to avoid unintended tax consequences.

Special Considerations for Multi-Generational or Inherited Family Businesses

In divorce matters involving multi-generational family enterprises, additional considerations apply. These may include:

• The existence of trust interests or estate planning mechanisms
• Shareholder or partnership agreements with transfer restrictions
• Concerns regarding disclosure of proprietary business information
• Impacts on other family members or business partners not involved in the marriage

While the “all-property” approach allows the court to consider inherited or family-controlled business interests, courts may exercise restraint when awarding such interests outright to a non-family member spouse. Instead, the court may account for the value in the equitable division without disturbing ownership structures.

Family business owners should consider implementing prenuptial or postnuptial agreements that address the classification and distribution of business interests in the event of divorce. These agreements, if properly drafted and executed, may limit litigation and preserve continuity of ownership.

Protecting Business Operations During and After Divorce

The divorce process itself can destabilize business operations if not carefully managed. Confidentiality is paramount, particularly where financial disclosures, client lists, or proprietary data are involved. Courts may issue protective orders to limit the dissemination of sensitive business information.

Furthermore, business owners may be required to provide extensive documentation, including tax returns, payroll records, and customer contracts. Delays in producing this information or disputes over valuation can prolong proceedings and increase litigation costs.

Following divorce, it is often necessary to revise corporate governance documents, update ownership records, and reevaluate compensation structures, especially if one party is removed from the business or if income previously used to support a shared household must now support two.

Contact Us To Discuss Your Family Law Case

Divorce involving family businesses and closely held companies requires nuanced legal and financial analysis. When such matters are approached thoughtfully and with the benefit of experienced legal counsel, outcomes can be structured to reflect each party’s contributions and protect the ongoing viability of the business.

At Parrino|Shattuck, PC, we frequently represent clients whose marital estates involve substantial business interests. If you are contemplating divorce or seeking a second opinion regarding how a business may be treated in your case, we invite you to contact us. You may reach our Westport office by phone at 203-349-2012 or through our website to schedule a consultation.

FAQs

If only one spouse owns or operates the business, can the other still receive a portion of its value?

Yes. The court may award a share of the business’s value to the non-owner spouse. This may be accomplished through an offset in marital property, structured settlement, buyout or another method. This can apply even if the non-owner spouse did not actively work in the business, provided their contributions to the household or to the business’s success are deemed significant.

What if both spouses are involved in the business—can they continue to co-own it after divorce?

In theory, the court can leave both parties with joint ownership, but in practice, this is rarely advisable. Ongoing co-ownership can lead to conflict and instability, particularly if there are unresolved personal or operational issues. Courts typically favor buyouts or division of interests that allow each party financial separation and operational independence.

Can a prenuptial or postnuptial agreement protect a family business from being divided?

Yes, if properly drafted and executed, a prenuptial or postnuptial agreement can establish how a business will be classified and handled in the event of divorce. These agreements must meet procedural and substantive fairness requirements under Connecticut law. When enforceable, they provide clarity and may prevent litigation over valuation and ownership.

How do courts handle the business’s cash flow when determining alimony or support?

Courts may examine the business’s income to determine a spouse’s earning capacity and ability to pay support. However, this raises concerns about “double dipping” if the same income stream is used both to value the business as an asset and to calculate support obligations. Courts attempt to avoid unjust outcomes by examining how income and asset value overlap.

Can a court force the sale of a family business during divorce?

While courts have broad authority under Connecticut law to assign property, forcing the sale of a business is generally a last resort. Courts prefer to preserve the business’s continuity, particularly when it is the primary source of income or tied to a broader family enterprise. In most cases, the court will attempt to structure a buyout or award offsetting assets rather than compel liquidation.